“As goes January, so goes the year.” This is the essence of the January Barometer, a theory claiming that the stock market’s performance in January predicts its trend for the rest of the year. With the US stock market experiencing some volatility this month, it’s the perfect time to revisit this classic indicator and see if it holds any weight in the current climate.
A Little History Lesson
The January Barometer was popularized by Yale Hirsch, creator of the Stock Trader’s Almanac, back in 1972. He observed that when the S&P 500 had a positive return in January, the full year tended to follow suit. Conversely, a negative January often foreshadowed a down year.
What Exactly is the January Barometer?
The theory suggests that January acts as a microcosm of the market’s overall health and investor sentiment. A strong January could indicate underlying strength in the economy and boost investor confidence, leading to further gains. Conversely, a weak January might signal trouble ahead. This potential for self-fulfilling prophecy is built into the January Barometer: if investors react to a strong January by buying more stocks, that action itself can drive prices higher.
Why Might it Work (Sometimes)?
Several theories attempt to explain the January Barometer phenomenon:
- Year-end tax-loss harvesting: Investors often sell losing positions in December to offset capital gains taxes, pushing prices down. This selling pressure usually eases in January, potentially leading to a rebound.
- Seasonal liquidity: Institutional investors often receive year-end bonuses and deploy new capital into the market in January, boosting liquidity and potentially driving prices higher.
- Investor psychology: A positive start to the year can fuel investor confidence and encourage further investment, creating a self-fulfilling prophecy.
Fact or Fiction? Analyzing Historical Trends
Historically, the January Barometer has a decent track record, being right about 77% of the time when January is positive. However, it’s important to remember that the US stock market generally tends to rise over time. Yearly stock market returns have historically been positive two-thirds of the time, making it difficult to definitively attribute the market’s upward trend solely to the January effect.
Furthermore, the January Barometer’s predictive power is less reliable when January returns are negative. Following a loss in January, full-year returns have been negative only 54% of the time – barely better than a coin toss. This inconsistency highlights the limitations of the January Barometer, which can be influenced by various factors like economic conditions, policy changes, and unforeseen events.
Should You Base Your Investments on It? Probably not. The January Barometer is an interesting observation, but relying on it solely for investment decisions is risky. Remember, past performance is not indicative of future results.